An Entrepreneur’s Plan B

Entrepreneurs do not take the risks they do with their time, their money and their reputations in order to secure a comfortable retirement. They do it because that is who they are and what they do best. Some people choose to work at the factory, while others choose to fund, build and run those factories. It’s the chance of a lifetime that outlasts a lifetime. But only those willing, and those with enough faith in themselves and their abilities are willing to take the chance. Some just want more than the highest paying job; they want to create the job, hire others to do the job, sell their creation, look for the next opportunity.

But sometimes the most promising sprouts do not come to fruition. A retirement savings plan can be a Plan B for entrepreneurs. A successful endeavor may take the arc of life to a place where insurance is a minor concern and retirement savings will be inherited by the next generation. But just in case Plan A does not work out, every entrepreneur needs a Plan B.

Mark Twain’s Plan B was writing and lecturing for money. Samuel Langhorne Clemens was a prodigious entrepreneur. He escaped the Civil War and headed west to the silver mines of Nevada. He got rich and went broke as a way of life, but he wrote about it and that was his Plan B. Mark Twain was a creative genius but a terrible businessman. His world tour of 1895, when he was 59-years-old, allowed him to pay off the debts he incurred in self-financing a publishing company. Standup comedy was Mark Twain’s lifeboat in the sea of debt he had amassed.

Source: twain.lib.virginia.edu

The Earlier the Better

No matter what stage an entrepreneur’s business, no matter how long or short the cycle of the business, or where the business is in that cycle; savings opportunities exist that are both tax-deductible and tax-deferred. Contributions reduce a taxpayer’s current liability and grow faster because their returns are not taxed annually.

The maximum tax-deductible contribution for a person less than fifty years of age is $6000. But IRAs are a more significant investment opportunity than they are a tax strategy. For IRA contributions, as with any investment, final results are often related to the timing of entry, but the earlier the better.

An IRA invested at the average historic return of the Standard and Poor’s 500 Index may double every seven years by the rule-of-72. If a thirty-year-old entrepreneur deducted $6000 per year from personal income as an IRA contribution, did so for ten years and stopped, that retirement account would grow to $1.1 million by age 65.

Taxable versus Tax-deferred Growth

Tax-Advantaged Investments

At later stages of life or at later stages of business development, when the need to defer income rises, the tax-deferred options for entrepreneurs increase, but the income limits for contributions to ordinary IRAs become a factor.

A Simplified Employee Pension (SEP) allows a self-employed individual to contribute and deduct up to 25% of earned income up to a maximum of $56,000, based on a special calculation. SEPs become less beneficial to the entrepreneur as the business adds more employees because all employees must receive the same percentage of their salaries as contributions.

401(k) Plans allow an employer to contribute 100% of the participant’s compensation, again up to $56,000 but require a minimum level of matching of employee contributions. An employee’s contribution cannot exceed $19,000. A 401(k) is a better option for operations with many or a growing number of employees. A 401(k) can also be tied into a benefits package that includes health and disability insurance.

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is a 401(k) plan for businesses with less than 100 employees. A SIMPLE requires a minimum 2% contribution to every employee’s IRA or up to a 3% matching contribution. An employee’s contribution cannot exceed $13,000.

A Roth Retirement Account can be an IRA or a 401(k). Roth contributors do not deduct their contributions, but neither do they pay taxes on withdrawals in retirement. The same combined contribution limit applies to all Roth and traditional IRAs.

Tax-Advantaged Investment Accounts

 

Retirement

Plan Bs

Maximum

Contribution

(Under Age 50)

Deductible

Contribution

Maximum

Earned

Income

Taxable

Withdrawal

Maximum

Employee

Contribution

IRA

$6000

Yes

$203,000

Yes

$6000

SEP

$56,000

Yes

$203,000

Yes

$56,000

401(k)

$56,000

Yes

$280,000

Yes

$19,000

SIMPLE

$56,000

Yes

$280,000

Yes

$13,000

Roth

$6000

No

$203,000

No

$6000

 

Bottom Line for Plan B

Actors have understudies, baseball teams recruit relief pitchers and there’s a Vice-President just in case. Every entrepreneur also needs a Financial Plan B, just in case the unexpected happens to Plan A. For retirement savings, like lifeboats, the bigger the better, and the best time to start building one is now.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management, LLC, Spire Securities LLC or its affiliates. Investing involves risk, including the loss of principal. Past performance may not be indicative of future results.

Spire Wealth Management is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC